XLU fell 2%
The utilities sector—one of the most vulnerable sectors to interest rates—fell more than 2% after the benchmark Treasury yields reached a four-month high on September 19. The ten-year Treasury yield has been very strong. The ten-year Treasury yield has risen from 2.86% to 3.07% in September. Broader markets continued to climb and rose 0.1% on September 19.
The Utilities Select Sector SPDR ETF (XLU), a representative of S&P 500 Utilities, has risen almost 2% in 2018. Broader markets have risen almost 9% year-to-date.
Last month, Jamie Dimon, JPMorgan Chase’s chairman and CEO, said that investors should be prepared to deal with ten-year Treasury yields reaching 5% or higher. According to a Reuters article, Jeffery Gundlach, DoubleLine Capital’s CEO, said that he’s still forecasting ten-year Treasury yields to reach 6% by the next presidential election or a year after.
The expected strength in Treasury yields could be negative for utilities. Utility stocks generally trade inversely to Treasury yields. Higher interest rates could make utilities less attractive to bonds. Due to utilities’ heavy capital expenditure needs, higher interest rates make their debt servicing expensive, which eventually dents their profitability.
At large, utilities (IDU) are trading at a yield of 3.3%, which represents a yield premium of just 25 basis points–30 basis points compared to benchmark Treasury yields. The yield premium was ~150 basis points–200 basis points when Treasury yields were much lower late last year.
To learn how utilities performed recently and how they’re placed ahead, read Utility Stocks Compared to Broader Markets Last Week.